States as coordination problems

August 21, 2013 – 5:30 am

By Lorenzo

Economist David Friedman’s theory about the size and shape of nations leads him to postulate that the increased importance of labour income–a result of the Industrial Revolution: one of the ironies of history is that greatly increased propensity to produce capital increases both the scale (through increased demand) and then the average income (through increased relative scarcity) of wage labour–has led to modern states being either ethno-linguistically based, or having closed borders, because reducing the propensity for labour to exit increases the ability to tax labour, an increasingly dominant source of state revenue. And moving to a different ethno-linguistic milieu has definite exit/entry costs (as, obviously, do closed borders).

The increased importance of labour income, and use of the ethno-linguistic strategy for state formation, would also advantage a settler society speaking a widely used language, without a specific ethno-linguistic identity and whose culture becomes increasingly familiar due to novels, films, comics, TV and video and computer games. In other words, going to the US would be a way of minimising those exit/entry costs (with other English-speaking societies benefiting from similar effects). Though the global transmission of culture via electronic media may facilitate international labour flows in general: the Eurozone is losing educated young folk at considerable rates.

Have we got a network for you.

Exit/entry costs are also reduced if a faith community can provide a welcoming network. In Australia, the Maronite Lebanese have integrated much more successfully than the Muslim Lebanese, in no small part because the former–being members of a Catholic rite church–could and have plugged straight into Catholic networks.

So, the diverse religiousity of the US may have helped to make it more attractive to migrants–particularly in an age before the cultural familiarising properties of modern electronic media. Indeed, use of the coordination benefits of faith networks was crucial to the origins of the United States, as P.J. O’Rourke famously commented about the Clinton Administration’s handling (for want of a better word) of the Branch Davidians at Waco:

The Clinton administration launched an attack on people in Texas because those people were religious nuts with guns. Hell, this country was founded by religious nuts with guns. Who does Bill Clinton think stepped ashore on Plymouth Rock?

Though even in our IT age, the religious network advantage is likely still there. The US has been notably more successful at integrating its Muslim migrants than European countries–in part because coordinating through a local mosque is not that big a deal to a society already used to coordinating through local churches and synagogues. The most dramatic symbol of which was President George W. Bush speaking at a Washington mosque, in a very public appearance, a few days after the September 11 attacks.

Having a Latter-Day signalling problem.

It is therefore not surprising that atheism is a much bigger deal in such a society, since it is failing to signal public commitment to a set of identified norms (apart from presumed hostility to religious faith), to community participation or to being bound by network reputation effects. Hence polls regularly find that Americans are more willing to vote for a gay/lesbian president than an atheist one.

A previous such poll found that Americans were also more likely to vote for a black president than a Mormon one: which turned out to be true. That being Mormon was more polling-problematic than being black further indicates the power of religious identification in US society. That the GOP seems to increasingly identify as the Religious-Coordination-Party adds to the ironies. (Seeing themselves as the white Religious-Coordination-Party is clearly an electoral dead end; an ironic internal debate given that the Republican Party was founded on hostility to the “Slave Power” to avoid the trap of nativism: the late Robert Fogel‘s Without Consent or Contract is the best book to read on that.)

Tenured academics and similar professionals–with high income security and plugged into transnational job markets–are perhaps somewhat blocked from grasping the continuing social benefits of religious identification. Or, for that matter, angst about immigration via ways that voters get no say in. Immigration increases competition for labour income, makes capital relatively more expensive, increases crowding and communication costs and reduces local trust, encouraging crime. Not from criminal behaviour by migrants–most migrant groups engage in crime at much lower rates than the locally-born–but from reduced efficacy of policing and other social constraints. The benefits and costs of immigration are not equally distributed, with the net costs falling most heavily on voters with fewest social levers other than voting: the efficacy of migrant filtering mechanisms is a way of reassuring said voters, a reassurance that high profile unfiltered immigration (e.g. boat arrivals in Australia, undocumented border-crossers in the US) does not convey.

Similarity benefit

For there is another advantage of ethno-linguistic unity than higher exit costs; the easier coordination of policy (in particular, getting better return for your taxes). If people speak the same language, have similar expectations about behaviour, similar presumptions about how things work (and are supposed to work) and are embedded in encompassing social networks, it is much easier to develop and operate public policy that works to a relatively high level of satisfaction. So, other things being equal, the more ethno-linguistically homogeneous a society, the higher the tax-expenditure trade-off can be expected to be. It is therefore not surprising that the Scandinavian countries–with historically very high level of cultural homogeneity, relatively small populations without much geographical diversity–have had high levels of taxation and expenditure. (The link can be sorted by taxation levels.)

Sharing signals.

Conversely, it is not surprising that Australia, with one of the highest proportions of foreign-born citizens of any Western democracy, spread over a large and geographically diverse continent, is both a federal state and has continued to have one of the lowest tax ratios to GDP of Western democracies. Or that the US–with a very large, ethnically diverse population spread over a geographically diverse even larger area–is even more strongly federal and also has one of the lowest tax ratios to GDP of Western democracies. (Comparison with East Asian societies is complicated by their much higher reliance on [pdf] family and related structures. This may also be a factor in Ireland, including the Catholic Church in the “related structures”.)

Nor is it surprising that Austrian school economics–with its strong suspicion of the coordinating capacity of politics and the state–originated in the Danubian monarchy, the archetypal ethno-linguistically diverse polity. Or that Anglosphere economics–operating in always culturally diverse societies–has also been somewhat more sceptical about the coordinating capacity of politics and the state than Continental economics.

Coordination failures

If one wants an example of the public policy difficulties that arise from lack of cultural similarity or good communication links, then indigenous policy in Australia provides plenty of examples. In Richard Trudgen’s Why Warriors Lie Down and Diethere is the illustrative tale of the Galiwin ’ku fishing industry:

The Galiwin ’ku fishing industry consisted of several small fishing boats made from local timbers at Galiwin ’ku by the Yol?nu and mission staff. The Yol?u named these boats with holy names from their clain or ri?gitj nation alliance. The boats were owned by the mission but were skippered and crewed by different clans. Some small clans would come together in a ri?gitj alliance to make up a crew. …
These clan groups would use the boats and sell their catch to the mission for processing and re-sale to other places. The people clearly understood that what they caught was theirs until they sold it to the mission and they benefited directly from their catch. From the point of sale on, it belonged to the mission. This arrangement satisfied the legal requirements of both the Yol?nu and Balanda systems of law.
When the mission at Galiwin ’ku handed the fishing industry over to the Yol?nu council in 1974, everything proceeded well for a while because the mission staff also transferred to the council. For most Yol?u nothing really changed. Then in 1975 it was decided to get a loan from the government to develop the industry. The Aboriginal Development Commission ‘decided’ to bring in a consultant to look at the viability of the loan and how it could increase the efficiency of the industry. Following the consultant’s recommendation, one big, modern fishing trawler replaced the small boats. In the dead of night, the small boats were burned on the beach and one was cut adrift, to ‘convince Yol?u of the need to move up to the big boat’. Within six months the whole fishing enterprise at Galiwin ’ku had collapsed and Galiwin ’ku became an importer rather than exporter of fish products.
… from a Yol?u perspective the collapse happened because the separate clans and nation alliances found it impossible to work under one Balanda boss on the trawler, as the trawler captain now had to be licensed. Moreover, Yol?u were insulted and grieving over the destroyed boats. With no clear lines of ownership the people could not see that any authority had passed to them. …
To expect all the clans at Galiwin ’ku to believe they collectively owned the fishing company was like telling twenty-six Balanda companies that they collectively owned an industry incorporated as an association. … But this is not how community structures were set up. … The Yol?u fisherman did not see themselves as working for their own gain anymore; in fact, many now thought that the captain of the new trawler would reap the dividends. They had just become wage earners, and the incentive to work and build the industry for their own benefit was gone.
On top of all this, people had become confused about where these wages came from. In the past they saw a clear trade with the mission—so much fish for so much money. This trade was what the Yol?u were used to. Now they got wages no matter how many fish were caught. The steps in the development of a cash economy, with its system of wages-for-labour, are many. The Yol?nu were catapulted into the cash economy with little preparation.
With all this confusion, only conflict could occur, and economic development through industries like fishing was lost (Pp47-8).

How is the above different from straight-out colonialism (which, after all, also claimed to be operating for the good of the colonised)? Either way, it is a classic coordination failure from high communication costs–including profoundly different presumptions about property rights and contractual arrangements–and inadequate information feedback structures.

Spending your way into culture wars?

So, what happens when a society attempts to run a level of taxation-expenditure trade-off at a level high enough to over-strain its capacity to effectively coordinate, given its institutional structures and cultural diversities? It is reasonable to expect increased political tension and rancour. How much of the US’s cultural wars are a lagging result of the Great Society surge in federal expenditure [that continued under the Nixon Administration]? (Which perhaps does not bode well for Obamacare.) Conversely, welfare reform represented a partial re-balancing.

The non-Scandinavian countries on the top of the OECD’s tax-ratio-to-GDP list are Belgium, Italy and France. Both Italy and France became significantly more federal as their welfare expenditures grew. Both Italy and Belgium have strong separatist parties, as representatives of more prosperous regions (Northern Italy, Flanders) resent the apparently endless it-fails-to-get-better net transfers to the less prosperous regions (Southern Italy, Wallonia). While France has some very public social tensions, which lots of spending have failed to make much dent in. In the US, white resentment of apparently endless it-fails-to-get-better net transfers to African-Americans may be a factor in some of the voting patterns in the US.

How well are African-Americans and Southern whites doing from their near-monopoly political providers?

For a possible result of over-reaching is simply poor public policy. Either because coordination failures lead to poor responsiveness, inefficiency and waste or because too many payoffs and privileges have to be handed out to get enough political support to get things through or all of the above. Fiscal management may also become more difficult, as demand for expenditure becomes harder to reconcile with willingness to accept taxes–with too many voters not seeing such taxes as giving them enough benefits.

The United Kingdom is a country highly differentiated both vertically (class differences) and horizontally (ethnic differences). That there are increased separatist pressures is obvious. Though the Scottish Nationalist Party (SNP) aspirations rest on North Sea oil, which may be a much weaker reed than they think, since the good folk of Orkney and the Shetlands do not identify as Scottish and a great deal of the oil is off Orkney and the Shetlands, not Scotland proper. (Shades of the Amerindians of northern Quebec threatening to secede from Quebec if Quebec seceded from Canada.)

One of the features of recent economic events is that the British economy has performed notably poorly: rather worse than the demand-side problems suggest. This implies supply-side problems; such problems are classically the result of problematic public policy.

It may well be that Britain is too deeply differentiated a society to have as large and as centrally run a state has they have been trying to have. The UK is more differentiated both vertically and horizontally than, for example, Protestant and Catholic Germany, which has the Lander to reduce coordination difficulties. Ironically, DEM’s posts on the various problems with the incumbent Cameron-Clegg Coalition Government’s welfare cutbacks illustrate those very coordination problems.

Coordination constraints

Public policy is not a matter of mix-and-match taste sensation, choose any combination you like. To work well, a policy regime has to be compatible with the capacity of the political apparatus–given the level of diversity it has to cope with–to coordinate policy (including the delivery thereof). The more diverse the society, the more varied the presumptions and expectations, the less encompassing the social networks (political scientist Robert Putnam’s famous choral-societies-as-indicator), then the more difficult policy coordination becomes and the more sensible it is to accept a lower level of tax-expenditure trade-off.

One of the issues with immigration is that it can increase the demand (including the politicaldemand) for state expenditure yet lower the optimum level of tax-expenditure trade-off. It is possibly not entirely coincidental that Sweden’s tax-ratio-to-GDP has been falling as the society has become more culturally diverse.

More is not definitively better (but neither is less). Taking the UN Human Development Index as an indicator, Norway (taxes 43% of GDP) is number 1, Australia (taxes 26% of GDP) is number 2. Norway’s balance works well, but so does Australia’s. The UK, at number 26, appears to be doing not quite so well out of its 36% of GDP taxes. Perhaps time to consider major changes to its policy regime. After all, the previous attempt to seriously tackle the policy regime had significant success.

7 Comments

Interesting perspective. I wonder though, if the cultural diversity in Australia and elsewhere means an actual divergence in expectations and desires for the role of government, or whether it’s merely a perceived divergence in expectations and lack of intercultural trust that drives the lower government role.

It is possibly not entirely coincidental that Sweden’s tax-ratio-to-GDP has been falling as the society has become more culturally diverse.

Depends on how you read the graph in your link, which actually says nothing at all about levels of cultural diversity let alone any change. I could read the graph as saying Swedish tax was a lowish 38% when cultural diversity was almost zero (apart from Samis) in 1970, even lower before that but is now much higher at 45% along with much greater cultural diversity. Nonetheless I’m partial to the ideas that some link may exist.

As an aside, I find the Super Economy blogger’s attempt to put Sweden’s successful experiment in social democracy interesting. I used to find arguments like these convincing but now I’m not so sure. This is because various authors, including Ha-Joon Chang who wrote Bad Samaritans; The Myth of Free Trade and the Secret History of Capitalism has provided numerous examples of how our perceptions of other cultures has changed and our amnesia to same. For example, in the late 19th century Anglo travellers often described the Germans and Japanese as lazy and disorganised, the exact opposite of current perceptions. Also Confucianism, now often praised by right wing economists as a factor in the success of the Asian Tigers was once derided, sometimes with good reason, for being a fetter on economic development. This type of cultural analysis may be little more than Just So stories or maybe stories that confuse cause and effect.

ps. Your posts are getting way too long and grandiose for my 5 minute attention span. Ignore my advice if you wish but I think you’d benefit from being a little less ambitious.

Not commenting on the wider post – just a nitpick. That is an incredibly misleading chart you got on US Entitlement spending. It’s in nominal dollars (look at the correlation of its growth with inflationary episodes) and does not relate the spending to household income at all. Of course as wages get higher the contributions drawn from those wages, and hence the entitlements they fund, get higher. Plus the “Great Society” phase ran from 1964 to 1967 while the biggest increases(both in real and nominal terms) occurred under that awful liberal Richard Nixon.

The moral is – don’t draw charts to illustrate a serious post from politically-motivated people. Especially not from the thoroughly postmodern US GOP.

BTW, I do second Mel’s point about how our narrative of other cultures – indeed of our own – keeps changing according to the intellectual convenience of the Very Serious People of the day.

Its enough to turn you Marxist (“it is not men’s understanding that shapes their social existence, but their social existence that shapes their understanding”), or at least think the postmodernists actually have a point somewhere in all their pompous neologisms.

[email protected] Fair cop guv. I just grabbed because it was quick and easy. I have replaced it. And yes, one of the ironies is that Nixon was quite a spender, even given that the President proposes and Congress disposes. (He was also a strong enforcer of civil rights law; a complex guy.) Also, the ideology of the government presiding over the spending is not really the issue.

[email protected] On the changing narratives point, I tend to be sceptical of cultural causation precisely because people (and so cultures) adapt to incentives. (And also generate them, it’s complex.) Deepak Lal separates cultures into more basic “cosmological” elements and more malleable “material” elements. There is something in that.

On Sweden, cultural diversity and taxes, I assume that there are lags involved and would not claim that the only thing that was happening was increasing cultural diversity. Still, it is something that is happening and there are distinct signs of social stress–both the sharp-end (riots) and the polling end (voting shifts).

On post complexity, partly it is because I am working through ideas and partly it is trying to be fair to the material. Short can be simplistic. If I was just concentrating on one subject, it would be easier because I could just do a point at a time.

[email protected] New questions do lead folk to look at issues in new ways. But yes, there are definitely intellectual fashions.

But I have had an annoyance over the “lets copy Sweden” urge for a long time. The notion that they are simply more moral than us benighted Anglos has never seemed a sensible approach. Yes, their policy regimes work, but they are very different societies. And so does ours.

Danish psychologist Nicolai Sennels provides some striking contrasts in perspectives between Muslims and “Westerners” (by which he means Scandinavians). Those sort of differences help explain why second generation Muslim girls are tending to assimilate in Europe while second generation Muslim boys are more likely to de-assimilate (i.e. be more alienated from the host society than their parents).

But they also feed into different expectations about the state, about interactions with state personnel, with others, etc.

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